Sayonara Jim Beam

January 13, 2014

The Japanese liquor company Suntory Holdings has offered to buy Beam Inc., maker of Jim Beam, Makers Mark, and Knob Creek, for $13.6 billion, creating the world’s fourth-largest liquor company by volume, according to the WSJ. In addition to many Kentucky bourbon brands, Beam owns Laphroaig Scotch, Sauza Tequila, and many other worldwide brands. Probably a large share of the company’s revenue and profits are earned outside the U.S. The move is reminiscent of what happened to the beer business in recent years, with both Budweiser and Miller purchased by foreign-based multinational corporations. Name your favorite beer or liquor and chances are it is owned outside the U.S.

Taxes have a lot to do with it. Beam was a sitting duck as a merger and acquisition target because taxes make the U.S. uncompetitive as a multinational headquarters. Not only does the U.S. have the highest corporate tax rate in the developed world (39 percent) but, unlike Japan and most other developed countries, the U.S. applies that tax rate to multinational corporate profits earned abroad as well. That is, the U.S. taxes companies on a worldwide basis, rather than on a territorial basis. By putting Beam in Japan, the new company will enjoy a (slightly) lower corporate tax rate, but more importantly exemption of most profits earned abroad. That is, the new company will pay corporate taxes in each country in which it operates, without paying any additional “toll charge” for bringing those profits back home, as is done currently to U.S. multinational corporations.

Jim Beam is only the latest U.S. company to flee the developed world’s most burdensome corporate tax. Other recent moves include Applied Materials, which moved from California to the Netherlands last year, a number of pharmaceutical companies, such as Perrigo, Actavis, Jazz Pharmaceuticals and Gentium, and a series of oil and gas companies.

The end result is a steady decline of the U.S. corporate sector over the last 30 years, such that there are now fewer U.S. corporations than at any time since the 1970s. Unless the U.S. makes a strong commitment to corporate tax reform, such as Japan is doing right now, U.S. corporations and their tax revenue will continue to flee.

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